Dubai: The international sukuk market is another victim of the credit squeeze that has destroyed investor confidence around the world - it has seen little activity this year.
Only one international dollar deal has been recorded so far in 2009, according to Dealogic, the data provider. This was a $650 million (Dh2.4 billion) transaction from the Indonesian government, which launched its first global Islamic bond this month.
The rest of this year's $2 billion-plus issuance has been in local currency deals, almost entirely in Malaysia, the biggest market for Sharia-compliant bonds. These issues have been, in the main, small transactions of less than $100 million.
The seizing up of the market has followed the worldwide evaporation of liquidity, which has affected conventional fund-raising as well as sukuk, bonds which are structured to avoid paying interest, in line with Islamic law.
Anzal Mohammad, global head of Islamic finance at Allen & Overy, the law firm, says, "Since the collapse of Lehman Brothers in September, the market has slowed to a halt but that is more due to overall sentiment rather than a particular problem in the sukuk market.
"It is not just the Islamic bond market that has dried up. The conventional bond markets have been badly hit too."
Mohammad thinks the market is about to see an increase in activity - a number of banks are preparing to launch deals on the back of the improvement in sentiment, which has seen conventional equity and credit markets rise sharply since early March.
Mohammad says the stabilisation of the oil price at about $50 a barrel, after it dropped to lows close to $30 a barrel in January, has also raised hopes that the sukuk market may be on the point of reopening in earnest.
This is because the Middle East, which relies heavily on oil for its wealth, is one of the biggest markets for issuance of international sukuk.
Mohammad says there have been a number of conventional sovereign bond deals from the Gulf in the past few weeks. These, he says, could pave the way for Islamic bonds, as issuers become more confident that they can attract investors.
"There are a number of sukuk deals that are being worked on. We will see some sovereign issuance first, then the corporates will start coming to the market," he adds.
However, once the international market does properly re-awaken, it is likely to be slow, as investors remain cautious and risk-averse following the financial shocks of the past year.
It will certainly take time before the market matches the pace of growth in the early part of 2007, when it was one of the fastest expanding markets in the world.
That year saw $27 billion worth of new bonds issued - nearly three times more than 2006, according to Dealogic.
This growth was particularly impressive considering most of the issuance was in the first half of the year, before the credit crisis blew up in August 2007.
The sukuk market, which is forecast by Moody's to rise to $122.7 billion in outstanding issuance this year - compared with just $1.8 billion in 2001 - is also likely to re-emerge as a rather different animal when it kicks into gear. This is because bankers and lawyers, always on the look-out for new structures for the design of Islamic bonds, have been reined back by religious scholars.
These scholars banned two types of structures that became popular in 2006 and 2007 - known as musharaka, an Islamic joint partnership, and mudaraba, a form of trust financing - in February last year.
The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions ruled that these structures were breaking Islamic laws because they offered investors a repurchase undertaking, where the issuer promises to pay back the face value of the bond when it matures or in the event of a default.
This looks like a guaranteed return, which goes against the spirit of Islamic finance, they ruled.
It means once the sukuk market does revive, it is likely to be dominated by just one type of bond.
This is the asset-backed ijara structure, a sale and leaseback arrangement that uses revenues from an asset, usually a building, to pay investors. These payments are based on rent or profits.
This is not considered a guaranteed return as the physical asset could, in theory, lose value, although investors invariably get their principal back as they would with a conventional bond.
"Ijara will be the main type of structure from now on," says Mohammad. "I don't think the market will suffer too much from having just one main structure."
Most analysts believe the sukuk market still has great potential, with many forecasting it can at least triple in size.
This is based on expectations that more Muslim investors will turn to Islamic financial products.
The European Islamic Investment Bank believes 60 per cent of Muslim investors will eventually do so, compared with about 20 per cent today.
It is also hoped that non-Muslim European investors, who were increasingly buying sukuk as a way to diversify, before the credit crisis, will return to the market.